The Importance of Nexus in State to State Business

When conducting business across state lines, it is crucial to have a thorough understanding of nexus laws.

While the word “Nexus” has a variety of meanings, when it comes to taxation, “nexus” refers to whether or not a person or transaction can be subject to tax in a particular jurisdiction. Sales and use tax nexus is one of the most common considerations for businesses, and the current law requires “substantial” nexus to be had in a state before said state can move to collect any tax. However, the definition of “substantial” when it comes to establishing nexus is not exactly cut and dry and varies state by state; jurisdiction by jurisdiction. Nexus used to be established by physical presence; however, the prevalence of online sales have made it necessary for states to consider an alternative to the physical presence test. The new nexus test is fashioned more on an economic nexus standard. However, the newly defined economic nexus standard has been questioned by various courts. The states are hoping the courts will reverse their position on these new economic nexus standards, thereby allowing their use. In allowing the use of the new economic nexus standard, the courts would need to recognize that many of the sales and use tax laws were created and interpreted before the development of readily available sales tax software and before the eCommerce marketplace exploded. As you can see, nexus can be tricky to navigate!

Retailers and service providers are especially affected by nexus rules, but buyers of property and taxable services should have a good understanding as well. A recent Tax Executive article provides a thorough look into the current state of nexus law, as well as explains what businesses need to consider and do to remain in compliance.

 

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